💹 Major Currency Snapshot:
USDZAR: 18.99
EURZAR: 21.43
GBPZAR: 25.12
Introduction:
US President Donald Trump’s aggressive trade tariffs, particularly those imposed on China, have generated significant global economic uncertainty and the potential for a global recession. This situation has far-reaching implications, affecting international trade, currency valuations like the South African rand and the US dollar, and the economic outlook for countries worldwide, including South Africa.
Key takeaways from sources:
- Trump’s tariffs, particularly those targeting China, are a major source of global economic uncertainty and raise the risk of a global recession. Experts like Dr. Gustav Brink warn that these tariffs could significantly decrease world trade.
- The uncertainty surrounding US trade policy, including rapid shifts in tariff announcements, has reduced faith in US policymakers. This has led investors to seek safer investments outside the United States.
- The US dollar has been impacted by these trade concerns. It has edged up from a three-year low against the euro but remains near a six-month low against the yen as investors worry about the tariffs’ effect on the US economy. The dollar’s movement is now driven more by asset flows than traditional factors like interest rate differentials, indicating a potential “rethink of U.S. exceptionalism”.
- Factors contributing to the move away from the US dollar include a slowdown in the US economy, tariff uncertainty, broader US policy uncertainty, and improved sentiment towards Europe. Last week saw “deleveraging, liquidation, and asset re-allocation out of U.S. assets”.
- Other currencies have shown varied responses. The euro experienced its strongest decline in German investor morale since the Russia-Ukraine invasion due to US tariff uncertainty. The Japanese yen has strengthened against the dollar, while the Swiss franc also saw the dollar slump to a 10-year low. Risk-linked currencies like the Australian dollar, New Zealand dollar, and Sterling have shown strength.
- Japan is seeking the full removal of additional tariffs imposed by the US. China has also called on Trump to abolish tariffs completely and has retaliated with its own tariff increases on US imports.
- Retaliation from other countries like China, Canada, and the European Union will put pressure on the United States, potentially making it the biggest loser in a trade war. The US might have to shift imports to countries with lower tariffs, potentially increasing trade deficits with those nations.
- Trump’s 90-day pause on some reciprocal tariffs suggests he might be “on the back foot”. Economic advisors may have convinced him that US consumers are suffering the most from the tariffs, potentially leading to voter reversal.
- If the trade war with China continues, prices in the US are likely to increase, fueling inflation and potentially leading the Federal Reserve to raise interest rates, despite Trump’s pressure to lower them.
- China will seek other markets for its exports, potentially leading to “dumping” and increased anti-dumping and safeguard investigations, which could harm domestic industries in other countries and impact employment.
- South Africa faces significant risks depending on the outcome of the 90-day pause and the US-China trade war. If South Africa cannot negotiate away the reciprocal tariff, it will be subject to the standard 10%.
- South Africa’s exports to the US, mainly metals, minerals, and agricultural products, might face challenges, particularly fruit exports if punitive tariffs are imposed. Vehicle exports will also be subject to tariffs similar to other countries, with the future depending on international car companies’ supply chain restructuring.
- South Africa’s Reserve Bank has cautioned that global borrowing costs are likely to remain higher for longer due to doubts about inflation amid Trump’s tariffs. Heightened global trade tensions and domestic uncertainties have reduced confidence in the medium-term outlook.
- The South African rand’s recent strengthening was partly due to dollar weakness and reports of potential changes to a planned VAT increase, indicating the influence of both global and local factors. The ANC’s clash with its coalition partner, the DA, over the VAT hike also contributed to the rand’s volatility.
- The South African central bank anticipates that a proposed VAT increase could add to headline inflation.
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